Something about insurance seems to make some politicians act
crazy. Probably it’s because the two activities – politics and insurance – are
so antithetical. Whether buying or selling, the essence of insurance is
prudence, taking the long view, refusing to be unrealistic and paying attention
to the lessons of the past. Politics as practiced in the modern welfare state is just the opposite: Ignore history, focus on the short term and make policy based on the whims of public opinion rather than reality. Imagine what would happen if an insurance company tried to run its business that way: It would be bankrupt within months and those with legitimate claims would never get paid.

Perhaps this explains a package of bills trumpeted recently at
a Lansing press conference that sponsors claimed – and the press dutifully
reported – would "cut insurance rates by 20 percent." What a great idea! If it’s that easy, how come no one thought of it before?

Of course it’s not that easy and the legislation would do
nothing of the sort. Like all such proposals, the only thing these bills would
do is make insurance unavailable at any price. They’re just a re-packaging of
bad ideas that have been around for years, and essentially boil down to
prohibiting insurance companies from charging premium prices that accurately
reflect risks and restricting procedures for limiting payouts on unjustified,
frivolous, or fraudulent claims. Even if not passed, the mere fact that such
bills are promoted by prominent members of the political establishment may raise prices by discouraging new providers from entering the market.

Insurance companies base their premiums on risk assessment
factors that have proven in the past to be good indicators of the likely cost of insuring various customer categories. For example, if you live in Detroit –
which has just 9 percent of the state’s population but more than a quarter of
its 50,000 annual car thefts – you are more likely to file an auto theft claim,
so you pay higher premiums. If you are the kind of person who always pays bills
on time and avoids excessive debt, you’re probably cautious in other areas and
may earn an insurance discount. And if courts limit extra-added "pain and
suffering" lawsuit awards by only allowing them for auto injuries that inhibit a person’s "general ability to lead a normal life," then insurance
premiums will be lower than if the less seriously injured can also get such
awards. (This "pain and suffering" restriction is part of Michigan’s no-fault
auto insurance system, which already paysall the
actual medical expenses of an injured motorist without having to file any
lawsuit).

The legislative package touted at that press conference
restricts prudent practices in most of these areas, so it won’t lower rates.
Limiting insurers’ ability to charge higher auto rates in high-theft areas just
raises everyone else’s premiums. Banning discounts based on credit records means frugal individuals must subsidize high-risk deadbeats. Requiring courts to use loosey-goosey "disability" definitions means that less seriously injured people can collect as much as the genuinely disabled, so auto insurance rates rise for everyone.

What happens if the state implements these measures and then
orders insurance to be sold at a price that won’t cover the risks? You can
probably guess, but let me illustrate with an analogy:

Imagine a state that prohibited restaurants from charging more
for lobster than for hamburger, mandated that every customer be given unlimited
refills at no extra charge and banned selling any meal that doesn’t include
dessert and a nice bottle of wine. Then, promising diners a 20 percent savings,
the state ordered all restaurants to lower their prices to less than the cost of
replacing the food served. A year later would there be more or fewer
restaurants?

Limiting the ability of insurance companies to control
unreasonable claims or price their products to match the risks makes no more
sense than these restaurant regulations and would produce the same result: There would be fewer providers, less competition and ultimately higher prices.
Politicians who play demagogic insurance regulation games should pray they don’t get what they ask for.

#####

Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and
educational institute headquartered in Midland, Mich. Permission to
reprint in whole or in part is hereby granted, provided that the author and the
Center are properly cited.

ISSN: 1093-2240,
SKU: V2005-34

Summary

The sponsors of a package of bills recently introduced in the legislature claim that their proposals would lower insurance rates. But measures that prevent insurance companies from pricing their products competitively or managing their costs will reduce the supply of insurance offered in the marketplace, which would tend to increase rates rather than lower them.